RBI holds on to policy rate, expects GDP growth at 7.8% this year
Reuters | Photo Credit: Raghuram Rajan

The Reserve Bank of India (RBI) decided to hold the key monetary policy rate at 7.5 per cent in its bi-monthly policy review meet on Tuesday, having snipped it twice since early this year. Although the street was split on whether the central bank would cut rate again, the wider expectation favoured a status quo.

VCCircle Poll had earlier said RBI would retain the repo rate and respondents had said they expect the central banks to snip rate by another 25 bps in the next two months.

The 30-stock benchmark index Sensex was down 0.3 per cent soon after the announcement.

Notably, RBI also retained the existing statutory liquidity ratio or SLR and cash reserve ratio or CRR. SLR is the reserve requirement that commercial banks are expected to maintain in the form of cash, gold or government approved securities before providing credit to the customers. CRR is the amount of cash banks have to keep with RBI.

RBI said it would maintain the accommodative stance of monetary policy but will wait for banks to pass on the rate cuts effected by RBI in January and February into their lending rates. RBI said it would closely monitor prices, especially that of food, in light of the recent weather disturbances and the likely strength of the monsoon, and assess inflationary threats.

"With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review," the policy statement said.

The two cuts in repo rate by RBI have not translated into lower lending rates for the use-end borrowers as the Indian financial system, which has been riddled with rising NPAs, has been reluctant to pass on the effects of lower rates.

RBI said it will look to a continuation and even acceleration of policy efforts to unclog the supply response so as to make available key inputs such as power and land. “Further progress on repurposing of public spending from poorly targeted subsidies towards public investment and on reducing the pipeline of stalled investment will also be helpful in containing supply constraints and creating room for monetary accommodation,” it said.

The monetary authority also referred to the anticipated hike in rates in the US—expected to lead to flow of money out of emerging markets—saying that it will watch for signs of normalisation of the US monetary policy. On the flip side, RBI said it anticipates India is better buffered against likely volatility than in the past.

The central bank reiterated that the outlook for growth is improving gradually and comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy.

RBI counted uncertainty surrounding the monsoon and unanticipated global developments as two major risks to baseline growth projections.

“Assuming a normal monsoon, continuation of the cyclical upturn in a supportive policy environment, and no major structural change or supply shocks, output growth for 2015-16 is projected at 7.8 per cent, higher by 30 bps compared with 7.5 per cent in 2014-15, but with a downward bias to reflect the still subdued indicators of economic activity,” it noted.

The second bi-monthly monetary policy statement for fiscal year 2015-16 is scheduled on June 2, 2015.

(Edited by Joby Puthuparampil Johnson)

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